Effect of Macro-Economic Factors on the Interest Rate Spread among Licensed Commercial Banks in Sri Lanka

This research highlights the effect of macroeconomic determinants on the interest rate spread in licensed commercial banks in Sri Lanka. Based on existing literature, the study focuses on four key macroeconomic factors influencing interest rate spreads: Inflation rate, Bank rate, Exchange rate, and Treasury bill rate. The research utilizes secondary data obtained from the Central Bank of Sri Lanka, covering the period from January 2003 to December 2023, and analyzes it using a regression model. The E-Views statistical package was employed to process and analyze the data sourced from the Central Bank's annual reports and website for the specified period.
Correlation analysis was employed to explore the relationships between the independent and dependent variables in the study. A regression model was used to assess the impact of macroeconomic factors on the interest rate spread. The results indicate that macroeconomic factors do influence the interest rate spread. Specifically, the study found that the exchange rate and treasury bill rate have a significant relationship with the interest rate spread, while the bank rate and inflation rate do not significantly affect the interest rate spread at a 0.5% significance level. Additionally, the bank rate, inflation rate, and treasury bill rates are positively correlated with the interest rate spread, whereas the exchange rate has a negative correlation. This study adds to the literature on factors that affect the efficiency of interest rate spreads, particularly highlighting the relationships among various aspects of interest rate spread. The findings could be valuable for financial managers, investors, financial management consultants, and other stakeholders.